MSCI and FTSE: Why African Countries Get Upgraded or Downgraded

MSCI and FTSE Russell are among the world’s leading financial index providers. Their benchmarks help investors compare stock markets and allocate capital across countries.

Their classifications divide financial markets into categories such as developed, emerging and frontier.

These classifications are particularly important for African markets because they can influence foreign investment flows, trading liquidity and international investor participation.

What Are MSCI and FTSE Market Classifications?

MSCI and FTSE Russell assess securities markets based on criteria including market size, liquidity and accessibility.

Developed markets generally have established financial infrastructure and high accessibility to international investors.

Emerging markets meet important investability standards but may have different economic and financial characteristics.

Frontier markets are generally smaller or less accessible.

MSCI also maintains standalone market classifications, while FTSE Russell uses its own eligibility and review framework.

A country can therefore have different classifications under the 2 providers.

How Does MSCI Evaluate Markets?

MSCI examines economic development, market size and liquidity, and market accessibility.

Accessibility includes foreign ownership rules, capital inflows and outflows, settlement procedures, investor registration and operational reliability.

These factors determine whether international investors can trade securities efficiently.

A country with rapid economic growth may still fail to qualify for emerging-market status if its securities market lacks sufficient liquidity or accessibility.

Why Are African Countries Downgraded?

Market downgrades can occur when investors encounter restrictions that make buying, selling or transferring investment proceeds difficult.

Nigeria provides an example.

FTSE Russell removed Nigeria from its frontier-market classification in September 2023 because international investors faced challenges repatriating capital.

Foreign exchange shortages and currency conversion difficulties affected market accessibility.

The decision demonstrated that market infrastructure can matter as much as the size of an economy.

What Happens During an Upgrade?

An upgrade can increase interest from international investors.

Institutional funds tracking emerging-market indices may need to purchase qualifying shares when a country enters their benchmark.

This can support demand for eligible securities and potentially improve trading activity.

However, the impact depends on the country’s index weighting, implementation schedule and available liquidity.

Market upgrades do not automatically make individual stocks attractive investments.

Why Does This Matter for Africa?

Africa’s largest exchanges include the Johannesburg Stock Exchange, Nigerian Exchange, Casablanca Stock Exchange, Botswana Stock Exchange and Egyptian Exchange.

Yet market capitalization alone does not determine index classification.

Foreign investor participation, settlement infrastructure, available securities and capital mobility also matter.

Smaller markets can make progress toward improved classifications by strengthening regulation, financial reporting and trading systems.

What Should Investors Monitor?

Investors should follow official classification reviews and examine changes in foreign exchange regulations, settlement systems and market liquidity.

They should also distinguish between proposed upgrades and completed classification changes.

Daba Pro provides African equity research, while Daba Capital Markets offers information on supported listed companies.

The bottom line: MSCI and FTSE classifications can influence international capital flows into African markets. However, investors should assess company valuations, financial performance and market accessibility alongside index status.